Ideas are at the core of Innovation. We use ideas to add features and improve existing ones of products to get our job done better. Besides, once we succeed in inventing technology, we come up with radical ideas in changing the technology core of products. Through ideas, we keep making products better as well as less costly to produce. The consumption of increasingly better products at lower cost keeps improving our living standards. On the other hand, producers get encouraged to supply them as ideas, reduce the cost of production, and expand the market. Furthermore, innovation progresses in offering increasing Utility from the same resources while causing less harm. Apparently, we have an unlimited supply of ideas, as we are all creative by born. However, those ideas matter which can make products better, preferably also cheaper. From this perspective, there seems to be a scarcity of ideas impeding innovation-led prosperity.
There is a demand for those ideas that can create economic incentives for both consumers and produces. More important, those ideas should also contribute to cause less to the environment. Making products better, cheaper, and less harmful to the environment appears to be conflicting in nature. Hence, it’s quite daunting to find qualifying ideas.
Ideas, Objects, Innovation, and Prosperity
Economists always struggle with scarcity to offer us increasing prosperity. The challenge is to offer increasing living standards to a growing number of fellow human beings. In economic value creation, we use ideas to mix objects, like natural resources and labor. On the backdrop of depleting resources and increasing environmental degradation, our sole means of dealing with scarcity is to increase the supply of ideas. In the Market Economy, profit-making opportunity to determine the quality of ideas. If we run short of ideas for increasing consumer and producer surpluses, the race of innovation slows down. Consequentially, our economic prosperity suffers.
Many countries of the world are suffering from persistent poverty or low quality of living standards. The scarcity of objects like natural resources is easily visible. But some natural resource countries are not as prosperous as they should have been. On the other hand, countries having a high scarcity of natural resources, like Japan or Germany, are highly prosperous. There is a role of the idea gap for having disparity in prosperity. The common suggestion could be that less developed countries should develop barrow ideas from advanced ones. Well, such borrowing often does not create profit-making opportunities. For example, the idea of the automobile has made Germany rich. But upon having access to this idea, developing countries cannot profit from it for driving their prosperity.
Developing countries cannot profit from innovation by borrowing ideas
The economic value creation potential of ideas in the market economy is a function of time. Moreover, there is also a need for complementary assets to turn them into economic value. For this reason, having access to ideas does not create equal opportunity for all. Hence, those ideas matter which enables firms and countries to create economic incentives for both producers and consumers. From this perspective, ideas have been scarce impeding innovation. Moreover, such scarcity is also growing in advanced countries. Furthermore, ideas of innovation do not create prosperity for all. For example, ideas of labor-saving innovations are offering prosperity for a few countries only.
Examples of the scarcity of ideas impeding innovation
Tinkering-based ideas gave birth to great innovations like a light bulb, automobile, or airplane. Many of these innovations are reaching saturation. For example, the Automobile idea alone has been generating $4 trillion in revenue. But the same idea is costing as high as $1.5 trillion economic loss due to air pollution. On the other hand, accidents due to automobile are damaging as high as 2% of global GDP. Hence, the initial automobile idea is reaching the limit of creating additional economic value.
To reduce the loss of lives and economic value, we have been working on replacing human drivers with autonomous capability. Over the last 07 years alone, almost $80 billion has been invested in nurturing autonomous driving. Still, we are far away from reaching the goal. On the other hand, significant resources have been allocated over the last three decades behind fuel cells and batteries to replace polluting gasoline engines. Still, we are away from the target of making the electric vehicle as a creative wave to cause destruction to gasoline-based ones.
Decreasing research productivity is increasing scarcity of ideas impeding innovation
Research productivity is an important factor in figuring out the level of scarcity of ideas. The cost of R&D is very easy to calculate. Outputs of R&D investment are ideas. These ideas are added to product and process features to produce economic returns. The ratio between R&D investment and the economic return obtained from trading-produced ideas is a measure of R & D productivity. The economic return not only depends on the nature of ideas. Most important, it depends on the competition, and also on the existing products.
For example, fuel cell-based electric vehicle appears to be a great idea for reducing staggering economic loss. Hundreds of millions of dollars went for R&D. Yes, it produced knowledge and many patents. But it has not produced any economic return yet. The first cause has been the penetration barrier posed by gasoline vehicles. And the 2nd one is the uprising of the electric battery as a substitute for fuel cells. Consequentially, the R&D investment made for the fuel cells has so far failed to produce any return. However, we also face the natural limit of producing ideas. For example, as we keep progressing in generating ideas of storing increasing energy in per unit of material, our rate of advancement also keeps slowing down.
In fact, the purpose of research funding is not limited to producing intellectual assets. Until and unless these assets are integrated to improve the quality and reduce the cost of products, or develop new products generating profitable revenue, return on research investment is not delivered. Research finds that the correlation between research investment and commercially viable ideas is weakening—reported by researchers from Stanford University.
Declining research productivity is being offset by increasing the number of researchers
Research finds that the number of Americans engaged in R&D has jumped by more than twentyfold since 1930. Whereas, their collective productivity has dropped by a factor of 41. To offset this declining R&D productivity, there has been a steep increase in research and development funding. As it’s getting harder to create economically attractive new ideas out of research, to maintain growth roughly, the strategy has been to throw more scientists at it.
Stanford’s reported research findings conclude that research productivity fell, on average, about 10 percent per year. Consequentially, we require 15 times more researchers today than we needed 30 years ago to produce the same rate of economic growth. Such declining research productivity is not only a concern for advanced countries. It is also a serious issue for middle-income countries who are aspiring to be an advanced economy by leveraging innovation. Their hope of mobilizing increasing investment in research and development for driving economic growth is fading away day by day.
For example, in order to keep doubling the Silicon chip density every 18 months, the research effort behind the chip innovations rose by a factor of 78 since 1971. It could be put another way; the number of researchers required today to maintain an innovative pace in microelectronics in the early 1970s is more than 75 times larger.
Other industries also exhibit similar productivity fall in R&D. To maintain steady growth in agricultural yield during 1960–2015, research expenditure has experienced exponential growth. R&D outputs for improving yields, including cross-breeding, bioengineering, and crop protection, have fallen anywhere from three-fold to a more-than-25-fold, depending on the crop and specific research measure.
Due to the scarcity of ideas impeding innovation–is the endless frontier coming to an end?
To profit from ideas, development planners adopted a market economy. It created space for profiting from ideas through entrepreneurship. The public fund was also invested in creating the supply of knowledge and ideas to fuel innovation-led growth. On the one hand, the market economy encourages competition from ideas. On the other hand, it limits economic value extraction from ideas. Once better ideas show up, previous ideas lose the market value.
On the other hand, we are facing a natural limit in creating profit-making ideas. Hence, the argument of Prof. Vannevar Bush of opening an endless frontier of growth out of science is facing limits. On the other hand, weakening the entrepreneurship force due to scarcity of profit-making ideas also slows down the market economy. Consequentially, increasing prosperity tends also slow down.
